How effective is ‘Effects Test’?

02/04/2015

The Harper Review into competition policy both giveth and taketh away in its suggested amendments to Section 46, the market power section of the Competition and Consumer Act, leaving small retailers just about where they are now – with little protection against larger competitors wanting to see them out of the market.

Interesting analogy: Speaking to ABC radio, Ian Harper compared competition to a football game, where competitors need to hurt each other to win.

First, here’s what’s actually being proposed:
Section 46(1) currently prohibits a corporation with substantial market power taking advantage of that power for the purpose of either (a) eliminating or substantially damaging a competitor; (b) preventing entry; or (c) deterring or preventing a person engaging in competitive conduct.

It’s proposed this is amended to prohibit a corporation with a substantial degree of market power from engaging in conduct if it would have the purpose, or would have or be likely to have the effect, of substantially lessening competition. This prohibition would be subject to a new defence (the ‘devil in the detail’) which would be successful where the conduct:
– would be a rational business decision by a corporation that did not have a substantial degree of power in the market; and
– would be likely to have the effect of advancing the long‐term interests of
consumers.

– So this is the ‘effects test’ that the media keeps referring to. Therre has been little reference to the defence outlined above, which would seem to give plenty of scope for a large retailer to justify itsr behaviour in the marketplace. For instance, loss-leading retail marketing is a rational and accepted tactic whether a retailer has market power or not. Many retailers, big and small, do it on occasion. Long-term interests of consumers? An example could be a Big W or a Harvey Norman pointing to many years of 10 cent and 15 cent prints which they could argue have provided a long-term benefit to consumers.

The effects test is potentially a major change, however. Under the existing legislation one would have had to have come upon a ‘smoking gun’ memo saying something like, ‘Hey, let’s drop the price of bread to $1 so we send the local bakery broke.’

The other key change is to ditch the section of the act which refers specifically to below-cost pricing, namely Section 46(1AA), which prohibits a corporation with a substantial share of a market from supplying, or offering to supply, goods or services for a sustained period at a price less than the relevant cost to the corporation of supply, for a ‘prohibited purpose’ (see Section 46 (1)).

It’s not clear how this advances the cause of small retail competitors.

The Australian Retailers Association (ARA) has expressed concerns that the effects test as proposed won’t do much to protect small retailers, but hopes to influence the final legislation.

“The ARA will seek to work with the government and (Small Business) Minister Billson to find a workable solution – a solution which protects and allows for diversity of players’ said ARA executive director Russell Zimmerman in a press release.

Speaking on Wednesday to the ABC he said: ‘We certainly want to see the smaller independent retailers protected, but I guess the devil is in the detail, and we would like to see more of the detail on this.

‘What we have seen in the past is words around ensuring good competition and I do not think we have seen good, strong competition for the small independent retail sector.’

Independent Senator Nick Xenophon, who has shown a close interest in, and understanding of, competition policy over the years and has expressed more empathy for small business retailers than anyone else in Parliament, has outed the proposed changes as a con.

‘[The effects test] is completely unworkable, it is complex, convoluted, and will effectively mean business as usual.’

He said the the new measures would ‘entrench the dominance of players like Coles and Woolworths.

‘Big businesses will continue to get bigger and small businesses will struggle against unfair competition.’

He added that he would move amendments to Section 46 based on a simplified effects test after the budget session of Parliament.